Tag: Germany

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Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International

The main problem of a Greek exit from the euro zone is not necessarily the direct impact on banks. I believe our government when they say that they would be able to get that under control. The real problem is the next domino. The crisis will spread unchecked to Italy. If Greece leaves the euro zone, then owners of Greek bonds will lose their entire investment. At best, the Greeks would pay them back a small part of their investment — in almost worthless drachmas.

So what kind of investor in his or her right mind would purchase Portuguese, Spanish or Italian sovereign bonds in this kind of situation? Not even a yield of 7 percent can make up for all the risk that Italy won’t be able to pay back its debt. As things now stand, Italy’s debt accounts for 120 percent of its annual GDP, growth is close to zero and the country is currently slipping into a deep recession. In fact, it’s a matter of mathematical inevitability that Italy won’t be able to service its loans if interest rates on its sovereign debt don’t fall. Granted, there have to be reforms. But reforms don’t resolve an acute debt crisis. We’ve already learned that lesson from other crises.

via Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International.

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The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate

Mohamed A. El-Erian, CEO of PIMCO, describes four key dynamics that will shape the future of the global economy:

  1. Many economies have built up excessive debt that is now causing market instability. They have three options for de-leveraging: default, like Greece; austerity, like the UK; or “financial repression” like the US — where “interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors”.
  2. Economic growth would reduce the ratio of debt to incomes: “Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.”
  3. It is also important that the benefits of economic growth be shared across the entire community,  reducing income inequality and related social instability.
  4. Political systems in Western democracies, designed to support the status quo, are ill-equipped to deal with these “structural and secular changes”. Failure to adjust is the greatest risk.

“Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”

via The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate.

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ECB Fights to Put Lid on European Bond Yields – WSJ.com

Markets largely shrugged off the ECB, as long-term investors continued to dump everything but German bonds—considered the market’s safe harbor—and it became increasingly difficult to find private buyers for bonds issued by the large, indebted countries such as Italy and Spain…..The ECB fought a running battle throughout the day, traders said, in an attempt to drive the yield on the 10-year Italian note below 7%. The trading session started with price rally that drove the closely watched rate down to 6.84%. Then, as ECB buying lightened, private sellers took over, driving the yield—which moves in the opposite direction of price—up to 7.22%, according to Tradeweb data. Prices then rallied in the afternoon, with some market participants citing more ECB buying as well as comments from German Chancellor Angela Merkel indicating German support for more fiscal integration in the euro zone.

via ECB Fights to Put Lid on European Bond Yields – WSJ.com.

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Europe’s Economy Shows Weakness – WSJ.com

Italy was forced to pay its highest interest rate since the euro’s creation to sell five-year bonds—a sign of skepticism that new governments in Italy and Greece will be able to simultaneously boost economic growth and reduce high public-debt levels……Industrial production in the euro zone plunged 2% in September from August, the steepest slide since February 2009, according to the European Union’s statistics agency. The decline stretched from the weak periphery of Spain, Italy and Portugal to powerhouses such as Germany, France and the Netherlands. Compared with a year ago, output rose just 2.2%—the weakest gain in nearly two years. The data suggest “the euro-zone will soon fall back into another fairly deep recession,” said Ben May, economist at consultancy Capital Economics.

via Europe’s Economy Shows Weakness – WSJ.com.

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Europe consolidates

The FTSE Italian MIB index found support at 15000. Expect an upsurge in response to news that Mario Monti has been asked to form a new government. Breakout above 17000 would signal a rally to 19000. Rising 13-week Twiggs Money Flow indicates consistent buying pressure over the past few weeks.

FTSE MIB Index

* Target calculation: 17 + ( 17 – 15 ) = 19

France’s CAC-40 index similarly found support at 3000. Recovery above 3400 would offer a target of 3800, but 63-day Twiggs Momentum, a long way below zero, indicates a primary down-trend.

CAC-40 Index

* Target calculation: 2800 – ( 3400 – 2800 ) = 2200 AND 3400 + ( 3400 – 3000 ) = 3800

The German DAX found support at 5700. Recovery above 6400 would offer a target of 7100, while failure of support would warn of another test of primary support at 5000.

DAX Index

* Target calculation: 6400 + ( 6400 – 5700 ) = 7100

The FTSE 100 is also consolidating above medium-term support — this time at 5350. 13-Week Twiggs Money Flow continues to signal strong buying pressure. Breakout above 5700 would re-test the 2011 highs at 6100. Failure of support is unlikely, but would warn of another test of primary support at 4800.

FTSE 100 Index

* Target calculation: 5700 + ( 5700 – 5300 ) = 6100

We need to remember, however, that this is still a bear market. We have seen one or two favorable news headlines but very little substance. And the European economy faces strong headwinds over the next few years.

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EconoMonitor : EconoMonitor » Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s.

The current structure of Europe cracks under the slowly rising stress of vendor financing: export-based prosperity for some, debt-financed consumption by others. Unless reformed, this can only end badly. The global economy has similar imbalances. In 2010 the trade surpluses of China, Russia, and East Asia (China being half the total) were almost equal to the US trade deficit of $560 billion. OPEC, Germany, and Japan accumulated another $518 billion surplus. These numbers continue year by year, accumulating stress that will eventually break the current global financial order.

We should watch and learn from Europe’s experience in the months to come. We, and the rest of the world, may follow them sooner than we expect.

via EconoMonitor : EconoMonitor » Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s..

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America and China must “crush” Germany into submission – Ambrose Evans-Pritchard

Having followed the German political scene closely for the last five months, it is clear to me that almost the entire German political establishment is out of its depth, ideological, sometimes smug, apt to view the EMU debt-crisis as a Calvinist morality tale, and lacking in deep understanding of what it has got itself into.

One can understand German worries about money printing – and especially the loss of fiscal sovereignty and democratic control – but matters have already moved on. It is too late for that.

via America and China must crush Germany into submission – Telegraph Blogs.

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Germany must do it, not China | Credit Writedowns

In the end this is Germany’s crisis to resolve, not China’s. Germany has benefited tremendously from the euro. Nearly all of its growth in the past decade can be explained by its rising trade surplus which, given monetary policy driven almost exclusively by the needs of slow-growing and consumption-repressed Germany, came at the expense of the rest of Europe.

If the Germans want to save Europe, they must reverse their polices and start running large trade deficits even if that comes with slower growth. If not, the euro will break apart and peripheral Europe will almost certainly default on its obligations to Germany. Either way Germany loses.

via Germany must do it, not China | Credit Writedowns.

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The End of Population Growth – Sanjeev Sanyal – Project Syndicate

What demographers call the Total Fertility Rate is the average number of live births per woman over her lifetime. In the long run, a population is said to be stable if the TFR is at the replacement rate, which is a little above 2.3 for the world as a whole, and somewhat lower, at 2.1, for developed countries, reflecting their lower infant-mortality rates.

The TFR for most developed countries now stands well below replacement levels. The OECD average is at around 1.74, but some countries, including Germany and Japan, produce less than 1.4 children per woman. However, the biggest TFR declines in recent years have been in developing countries. The TFR in China and India was 6.1 and 5.9, respectively, in 1950. It now stands at 1.8 in China, owing to the authorities’ aggressive one-child policy, while rapid urbanization and changing social attitudes have brought down India’s TFR to 2.6.

…. it is likely that world population will peak at nine billion in the 2050’s, a half-century sooner than generally anticipated, followed a sharp decline. One could argue that this is a good thing, in view of the planet’s limited carrying capacity. But, when demographic dynamics turn, the world will have to confront a different set of problems.

via The End of Population Growth – Sanjeev Sanyal – Project Syndicate.

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SocGen: ECB will have to act – Ambrose Evans-Pritchard

Albert Edwards from Société Générale said the ECB will have to act, over a German veto if necessary. “The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail.”

“The impending threat of a euro break-up will force the ECB to begin printing money, very reluctantly joining the global QE party. The question is whether Germany will leave the eurozone in the face of such monetary debauchery,” he said.

via Europe’s rescue euphoria threatened as Portugal enters ‘Grecian vortex’ – Telegraph.

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